Aurobindo To Lupin — Pharma Companies Under Pressure As US Price Erosion Continues

Indian pharmaceutical companies experienced robust growth in the fourth quarter of fiscal 2024, with increased sales. There was also a noticeable easing of pricing pressure on US generics, raising hopes for improvement in the market plagued by shortages.

Despite most drugmakers witnessing revenue growth in the US market during the fourth quarter, questions on price erosion stabilisation remained. Major pharma companies were expecting benign pricing erosion and the pricing environment to stabilise. However, now the data shows otherwise.

The National Average Drug Acquisition Cost's latest pricing trends show a sharp double-digit decline in April–June 2024. NADAC is the approximate invoice price that pharmacies charge for medications in the United States.

US Medicaid publishes NADAC on a weekly basis, based on a survey of actual invoices between pharmacies and wholesalers.

In Citi's analysis of top baseline molecules of Indian generic companies—20 products each for Aurobindo Pharma Ltd., Dr Reddy’s Laboratories Ltd., Cipla Ltd. and Lupin Ltd.—close to 40-45% of the drug stock keeping units witnessed price increase in fiscal 2024, while the number of drug stock keeping units seeing a double-digit erosion was very less at 23%, resulting in a stable or modest generic pricing environment.

NADAC saw a sharp decline in the generic prices in April, only to fall further in May and June.

According to Citi's analysis of the top-70 products, approximately 80% have seen a double-digit price erosion in June 2024, against the average pricings in March 2024.

The average of drug prices in June indicated approximately more than 20% decline quarter-on-quarter for Dr Reddy’s and Lupin and 14% decline sequentially for Aurobindo and Cipla, based on the trends in top-20 molecules.

Citi introduced downside 90-day Catalyst Watches on Aurobindo Pharma and Dr Reddy’s.

Based on NADAC trends, it’s quite clear that generic pricing in the US is on a downward trend after a benign environment in fiscal 2024. If these trends hold, margins and earnings may see consensus downgrades, and that may also impact valuations that currently appear elevated, according to Citi.

Here is what brokerages have to say.

Citi

• Maintained a 'sell' rating with a target price of Rs 5,200 per share, implying a downside of 14.5%.

• Witnessed competition in its top products in the US.

• Impact of the pricing may be higher than the other companies.

• Impact of pricing higher due to commoditised portfolios.

Jefferies

• Reiterated 'underperform' rating with target price of Rs 5,010 apiece, which is a downside of 18%.

• IQVIA suggests company is losing market share in its top US products.

• Expects impact of loss in market share to reflect in first half of fiscal 2025.

• Top products contribute $417 million.

• Research and development cost could remain elevated.

• New launches to offset price erosion but do not drive meaningful growth.

• Strategic acquisition may fill gRevlimid void.

Citi

• Maintained non-consensus 'sell' with a target price of Rs 1,040 per share, implying a downside of 17.3%.

• Aurobindo has highest exposure of US generics among the Indian pharma companies.

• If generic pricing trends start reflecting, there is possibility of margins softening in first and second quarter of fiscal 2025.